Thursday, 19 November 2009

Trains, Planes & Range Bars

I was asked in an email why I use range bars and not time, tick or volume bars. The writer of the email knew I said it takes out the market noise but did not see all the benefits.

Let me say that I use range bars because they make me money. If I use any other type of bars I get stopped out more. Its as simple as that. Let me show you. Kiki,you need to pay attention to this.

Kiki,as you know we trade price, not indicators - price resulting from order flow. We look for vertical development to make money. Range Bars look at vertical development and discount the horizontal development. Time is taken out of the display. Some people say that this is a bad idea, but I follow how long it takes for a bar to form -  how much volume. A range bar that takes a long time to form is usually a result of no distinct direction of order flow. Business is equal two way and the price goes nowhere.

The second main reason I use range bars is that when I put on a trade, I want instant gratification. I don't want to see a number of bars against me so I get faked out.

Thirdly, range bars make my money management and position sizing easy. My trade size is always in multiples of three and my stops are usually a tick or two above two range bars. It makes it easy for me to put the trades on. The two bar stop is part of my setup and trigger. Note: Stops can be over-ridden by order flow in certain cases in my trading plan. 

The result of this is CONSISTENT RISK PER TRADE. Your trade has not only to go in the right direction but the mathematics of your trading has to work when you look at the result of percentage wins, percentage losses, average loss, average win and so on.

I do NOT believe that one winning trade will make up for a bunch of losers. I need a high percentage of winners with tight stops and scaling out of my position as the market moves.

The short today, trade #2 was a great example of the above. I went short at 1099.75 in what I thought was too early an entry when the market moved horizontally for three or four bars. My stop was 1102.50, a risk of $137.50 and the profit on each 3 contracts totaled $988. Look at trade #3. Exactly the same entry type.

If you look back at all the trades in the blog, this is the type of trading maths you will see and this is one of the reasons why the methodology makes money. Its simple.

Click to enlarge

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